All Things Smart Homeownership

How to boost your credit score

September 6, 2018

A good credit score goes a long way, and when it comes to buying a home, it's essential. It's no secret that a healthy credit score is one of the most important factors in securing the best mortgage interest rate, but it can also help you save on homeowners insurance, and even boost your profile with potential employers.

Understanding how your credit score is calculated and where those occasional fluctuations come from is a great start. Thankfully, it’s not as mysterious as it seems. If you're ready to start boosting that score and actively managing your credit history, you're in the right place.

How long will it take to see the boost? That depends on how your number got to where it is. Your credit score is based on your credit history, after all, so changing it will mean building a new financial trend in your life. Change like that takes time, so it’s best to think in terms of months, not weeks.

But don’t worry. All the best ways to boost your score are pretty straightforward. Do these six things, and watch your score start climbing.

1. Check (and correct) your credit reports

One of the only quick fixes for your FICO score (weeks instead of months), is to correct any mistakes on your credit reports (where credit reporting bureaus get the information that informs your score). If there’s a big mistake there, you might really be taking a hit. About 1 in 5 consumers do in fact have an error on at least one of their three reports, according to the Federal Trade Commission. So check your reports, and then keep checking at least once a year. Here's how.

If you need another reason to make reviewing your credit reports a regular thing, here you go: some employers will run a credit check before they hire you. But at least you’ll know about it: they need your written permission.

Need a really quick fix? If you’re already in the middle of applying for a mortgage and simple errors on your credit reports are dragging down your score, ask your lender about “rapid rescore.” For a fee, you’ll get action in a matter of days. Bankrate details how it works.

2. Pay your bills on time, every time

Your payment history on credit cards, car loans, utilities, etc. is the single biggest factor in your credit score, weighted at about 35 percent. Even a single 30-day-late payment could knock 100 points off your score — and that can really hurt. FICO considers how late you were, how many times, how much was owed, and how recently it happened.

You can’t erase the fact that you were late — that will stay on your credit report for up to seven years – but you can get back on track and move on. The farther slip-ups recede into the past, the less they affect your current score. If your credit history doesn't have a lot of other problems in it, your score will recover pretty quickly.

So if you’ve missed any recent payments, get current and stay current. We recommend setting up automatic payments or reminders for those times when life gets out of hand.

3. Pay down debt, especially on credit cards

The size of your debt accounts for about 30 percent of your credit score, so shrinking it is another priority. Your credit cards are the best place to start, especially if you’ve overdone it. Stop using them and start paying more than the minimum monthly payment on the one with the highest interest rate.

Once you pay off an account, you don’t necessarily want to close it. Having unused credit is actually very good, you’re building credit history and demonstrating that you have your financial act together. In mortgage terms, you’re a low risk. But lenders don’t want to see high balances or too much of your income going to monthly debt payments.

The last debt to pay off is medical debt. Even FICO recognizes that medical debt is the pits, so it hurts your credit score less than other kinds. Next-to-last is student loan debt, partly because it’s an installment loan that’s expected to be long-term: paying it off early won’t help your score (although it will help your debt-to-income ratio). It’s also understood as an investment in your future income.

4. Consolidate your debts, especially credit cards

Noticing a plastic-flavored theme here? If you have a bunch of credit cards with small balances, pay off most of them and pick one or two cards as your mainstays. Why? Because your score reflects not only your overall credit card debt, but also the number of cards that have balances. When it comes to FICO, the same debt is worse when it’s spread all over the place. Maybe it’s time for one of those balance-transfer deals. It might even be worth paying off your cards with a personal loan at a lower interest rate.

Again, once you pay off a debt, you don’t necessarily want to close the account or erase it from your credit report. A history of paying stuff off is a good thing. Plus, your credit “mix” accounts for 10 percent of your FICO score. A record of managing both revolving credit (like cards) and installment loans (like a car loan) will help your homebuying cause.

5. Stop applying for … credit cards

You know how you go to buy something at the mall, and they offer you a too-good-to-pass-up discount if you’ll just apply for their store card? It’s tempting, but for the health of your credit score, just say no. The way you learned in grade school.

Why? Because every time a potential creditor reviews your credit, a “hard inquiry” is recorded in your credit report and could cause a little dip in your score for a full year. Maybe that doesn’t sound fair, but there’s data behind it: According to myFICO, people who have six or more hard inquiries on their credit reports are eight times more likely to declare bankruptcy than people who don't have any.

Applying for new credit cards is the worst for your score, especially if you do it on a regular basis. With home, car, and student loans, FICO’s scoring formulas assume that you're shopping around for the best loan. You won’t get docked for the multiple inquiries — as long as you get your shopping done within 45 days. Checking your credit reports or your FICO score yourself is seen as a “soft” inquiry and won’t hurt your score either.

6. Control your credit utilization ratio (wait, what?)

If you’re one of those people who puts everything on a credit card to earn travel points or extra cash back, make a habit of paying off your balance regularly – like, more than once a month.

Your credit utilization ratio reflects how much of your credit you're using within a monthly billing cycle. Basically, you don't want the balance on your monthly statement to be more than 30 percent of your limit. Even if you pay it off in full by the due date, your score is getting dinged. The statement balance is what’s being reported to the credit bureaus, and a high one makes it look like you’re “utilizing” the plastic a lot. So try to keep the balance that shows up on your monthly statement under 20 or even 10 percent of your limit.

Another way to handle this is to get an increase on your credit limit (unless you’ll be tempted to spend more … as always, know thyself). That way, your typical monthly spending will be a smaller percentage of the limit. Just be sure that the boost doesn't require a hard inquiry (see number 5).

Ready to take the next step in your homebuying journey with all the confidence of a smart and savvy homebuyer? Our comprehensive online homebuyer course is simple and easy to access on your computer, tablet, and mobile device. It's all the information you need, all in one place. Go ahead and get started today.